Coffee Gets Retail Food Group Up and Going

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Franchising is a notoriously competitive space, and retail is supposed to be a difficult space at the moment, but RFG has a market-leading portfolio of brands, to which you can be sure it is eyeing potential additions.

But in 2014 it added to that line-up mobile coffee van franchise chain Cafe2U (September), Gloria Jean’s Coffee (October) and coffee roaster Di Bella Coffee (November), in a $200 million buying spree that saw it become Australia’s biggest coffee player measured either in terms of franchise brands, store counts or market share.

The Gold Coast-based RFG already ran 519 coffee outlets in Australia and 183 internationally, mainly under the brands Michel’s Patisserie, Esquires and BB’s, but the 2014 acquisitions brought 800 Gloria Jean’s outlets under the RFG umbrella – some under the It’s a Grind brand – across 40 countries, including 358 stores in Australia and 87 in the US.

RFG chief executive Tony Alford says that in just three years, RFG has more than tripled its total coffee throughput to 5.9 million kilograms – putting it well and truly in the coffee big league. Even more importantly, he said, coffee has provided a major opportunity for international growth.

RFG was established in 1989 to manage and develop the Donut King and bb’s cafe Brand Systems. It listed on the Australian Securities Exchange (ASX) in June 2006. The following year it made its first strategic growth initiative, buying the Brumby's Bakery and Michel's Patisserie franchise systems, and in 2009 bought the Queensland-based Big Dad's Pies franchise chain, which it ultimately folded into Brumby's Bakery.

In 2011 RFG bought the Australian and New Zealand rights to the Canadian-based Esquires Coffee franchise system, which operated outlets across the North and South Island of New Zealand. The same year, RFG added Auckland-based Evolution Coffee Roasters Group, which also brought with it the Roasted Addiqtion and Evil Child Beverage Company brands, further extending RFG’s wholesale and retail coffee presence.

The next expansion area to be targeted was pizza. In April 2012 RFG entered the gourmet pizza market with the acquisition of the 110-outlet Pizza Capers Gourmet Kitchen franchise system, and followed that in October with the purchase of Crust Gourmet Pizza.

RFG now consists of a network of eight franchise systems across the Donut King, bb’s cafe, Brumby’s, Michel’s Patisserie, Esquires Coffee, Pizza Capers, Crust Gourmet Pizza and The Coffee Guy networks. The company is now Australia’s largest gourmet pizza group, making more than 10 million pizzas a year. RFG is one of the largest retail food franchisors in Australasia with 2,476 outlets across 45 international territories, including Australia, New Zealand, China, Papua New Guinea, the Kingdom of Saudi Arabia, Indonesia, Singapore and the USA.

The financial results have flowed accordingly. In FY14, RFG reported a 15.2% lift in net profit, to a record $36.9 million, and lifted its full-year dividend by 11.4% to 22 cents a share. The highlight of that result was the fact that Pizza Capers and Crust Gourmet Pizza were now delivering 22.7% of earnings before interest, tax, depreciation and amortisation (EBITDA). Next it would be the turn of coffee to kick in.

In the half-year to December 2014, net profit surged by 46.4%, to a record $25.3 million, ahead of most brokers' expectations, helped by a one-off licence fee for the operation of the Gloria Jeans franchise in China, ass well as underlying growth in some of its traditional businesses such as Donut King and Michel's Patisserie.

The fully franked interim dividend was lifted by 7% to 11.5 cents a share, and outlet numbers increased by 77% to 2,476. For the first time in a reporting period, RFG could point to net outlet numbers for all brands increasing. RFG was able to lift its guidance for full-year net profit by 10%, to $55 million.

The sharemarket has loved the growth, with RFG rising from $2.46 a share five years ago to $6.68, for a total return (capital gain plus dividends) of 27.1% a year over that period. Over three years, RFG has delivered 42.8% a year; and the last 12 months has seen a gain of 70.6% to investors.

Amazingly, there seems plenty more growth to come as RFG beds down its growing empire. On Thomson Reuters’ numbers, the analysts’ consensus expects RFG’s earnings per share (EPS) to rise by 32% in FY15, to 34.9 cents a share, and lift a further 18%, to 41.2 cents a share, in FY16. The fully franked dividend is also seen rising, by 5.9% in FY15, to 24.1 cents a share, and by a further 16.2%, to 28 cents a share, in FY16.

Those expectations price RFG at a prospective FY15 price/earnings (P/E) ratio of 19 times earnings, and 16.2 times expected FY16 earnings. That is a little on the stretched side, but the growth profile flowing from the recent expansions – particularly coffee – appears to justify it. On a yield basis, RFG is trading on a prospective FY15 fully franked yield of 3.6%, rising to 4.2%, which is a handy addition.

The market is unambiguous: it expects more from RFG. The analysts polled by Thomson Reuters have a consensus price target of $7.83: that’s a cool 17.2% above where it is now. Franchising is a notoriously competitive space, and retail is supposed to be a difficult space at the moment, but RFG has a market-leading portfolio of brands, to which you can be sure it is eyeing potential additions.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au